Adam Smith's Lost Legacy

Tuesday, October 31, 2006

Once More on Markets and self-Interests

From an editorial in The Guardian, 31 October:

‘Adam Smith may be ‘best known for the invisible hand’ but that does not mean that what he said about it had anything to do with markets.’

First, it was ‘an’, not ‘the’, invisible hand and it was a metaphor, not a theory of markets. Shakespeare used the same metaphor in ‘Macbeth’ (3:2), as did Defoe in ‘Moll Flanders’ (1722). Smith wrote about human motivations sometimes having unintended benign effects in the single case he used the metaphor in Wealth of Nations (Book IV.ii.9: page 9). He referred to those individual merchants who preferred to invest their scarce capital locally because the risks of distant investment, especially overseas, were too risky for them. In doing so they sought their own gain (i.e., to avoid losses) and inadvertently ensured that domestic capital accumulation was greater than it would be otherwise.

His writings on markets and how they worked did not mention ‘an invisible hand’ as being part of anything in them (Wealth of Nations Book I.v. and vii). That he allegedly mentioned the connection with markets is one of those myths that grew by popular repetition.

Lastly, in many numerous references in Wealth of Nations, too many to identify here, Smith drew attention to the malign outcomes of individual self-interest such as the self-interest of monopolists, beneficiaries of tariff protection, guild members, bank fraudsters, criminals, dominant churches, interest groups, combinations of employers, trivial national interests of petty princes fighting expensive wars for vain glory, or whatever.

It is amazing that commentators popularly acclaim, allegedly under the authority of Adam Smith, an automatic connection between the exercise of self-interest and the beneficial outcomes on society. This suggests that reading his books, ‘Moral Sentiments’ and ‘Wealth of Nations’, must have been abandoned not long after he died in 1790.

And Not Just in the Tabloids

Quite a flurry among the chattering classes and their tabloid cousins is underway over the mostly innocuous issue of Adam Smith’s image on the forthcoming £20 note.The Independent, a London newspaper that runs daily front pages covered in full-size bad news about Iraq, the environment, the state of Britain and anything else that reflects on the government, and Tony Blair in particular.

Today, Mary Dejevsky writes on what she considers to be: “The Big Question: Who was Adam Smith, and does he deserve to be on our banknotes?”

Two sentences caught my attention (much of the rest is tediously tendentious too, but enough is enough):

“One of his central arguments was that pursuit of individual self-interest had the effect of advancing the common good - which was later interpreted by some as providing a justification for selfishness.”

“An equally suspicious mind could see the summary of Adam Smith's thoughts on the division of labour, to figure beside his portrait, as propaganda for capitalism.”

CommentIndividual self-interest could have the effect of advancing the ‘common good’, but it could have exactly the opposite in that it was intended only to advance the self-interest of the monopolist, the beneficiary of tariff protection, the guild member, the bank fraudster, the criminal, the dominance of a particular church, or interest group, the combination of employers, the trivial national interests of petty princes fighting expensive wars for vain glory, or whatever. Indeed, Smith gives so many examples of malign self-interest it is a wonder of modern psychology that so many can ignore Smith’s consistency on the potential for malign outcomes and still arrive at exactly the opposite conclusion to Smith, while claiming he agreed with them!

On the matter of the division of labour being seen ‘as propaganda for capitalism’, there is a particular irony. The division of labour did not start with capitalism (an economic system that post-dates Smith’s death in 1790). Apart from Plato writing about the division of labour, and others before Smith, it was described by Smith as beginning way back in ‘savage’ society when, in his ‘story’, an arrow maker swapped spare arrows for a share in the hunter’s kills.

Now, if anybody argues that I am wrong and that ‘capitalism’ came after Smith, nobody may argue with justice or conviction that ‘capitalism’ governed the exchange of arrows for meat many hundreds of thousand years ago. Smith suggested that the human propensity to ‘truck, barter, and exchange’ was occasioned by the ‘faculties of reason and speech’, an evolutionary event that places the consequent division of labour (Smith considered them to be linked) during the time of the hominids and before Homo sapiens speciated around 200,000 years ago, and not around 1830.

‘A Tory MP said: ‘The Bank of England note should have a great Englishman or woman on it.’

CommentsNB for MPs: the Bank of England was founded by a Scotsman, William Paterson (1658-1719), in 1694; the Bank of England is the central bank of the United Kingdom of Great Britain and Northern Ireland and is not specifically ‘English’. Its writ in monetary affairs cover all four constituent countries in the Union of England, Scotland, Wales and Northern Ireland.

NB for patriotic Scots: Paterson was also a founder for the Darien scheme in the Isthmus of Panama that bankrupted Scotland and drove it into a Union with England in 1707.

Note for all non-British readers: the above is another example of a family squabble or quibble that is normal in these islands and seemingly is trivial unless you are completely fluent in British insularity.

Monday, October 30, 2006

Smith's Singular Views on the Division of Labour

Chris Dillow of Stumbling and Mumbling, a lively economics blog, reports on the new Bank of England £20 note to be issued soon and asks: ‘Should the Bank really be celebrating Smith's view of the division of labour?’. His argument is summarized thus: ‘What puzzles me here is the note's celebration of the division of labour.Smith, of course, had mixed feelings about this. Yes, it increases output. But it also dehumanizes and stupefies us.’ He quotes from Wealth of Nations (WN V.i.f.50: pages 781-2). Read the piece at: http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2006/10/the_bank_celebr.html#comments

CommentI posted a reply on Stumbling and Mumbling as follows:

Smith on the division of labour, as on many other subjects, presents a more nuanced view of the subject than the simple pin factory and what Chris Dillow describes as ‘stupidity’.

First, the pin factory (WN I.i.3: pages 14-15) he quoted and the other one he visited were an example of one aspect of the division of labour; the other example was much richer in content and its implications as an example of the inter-sectoral division of labour, which he illustrated with the many contributors to the production of a ‘day labourer’s woollen coat’ (WN I.i.11 ; pages 22-23 ). This brought scores of people into contact through many transactions across the country and the world.

Second, Chris Dillow's references to the ‘stupidity’ problem may be missing the context in which he wrote the quotation (WN V.i.f.50: pages 781-2), namely ‘Of the Expense of the Institutions for the Education of Youth’ pages 758-81). In these pages he advocates a substantial expansion of education provision beyond the levels and extent provided for in England (and to some extent in practice in Scotland) and is marshalling all the arguments he can from the history of Classical Greece and Rome to convince his readers that ‘public expense’ in educating children of the poor is worth the money.

As many of the uneducated poor went to work around 6+ and not to school as things stood in the mid-18th century (and ever thus before then) his case (in the tradition of classical rhetoric) is focused on the strategic consequences for national stability if attention is not paid to the problem of a nation in which the bulk of its citizens were: ‘incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life’, to which he adds further in the paragraph (not quoted) that it ‘renders’ him incapable of ‘the life of a soldier’ and ‘defending his country’. A view clearly aimed at loosening the purse strings for education investment among the upper ranks of society, not by the effects on the minds of labouring people involved, but in fear of the consequences of ignorance if nothing was done to deal with it.

In short, it was a colourful case he presented for education using the division of labour at the micro-level as the rhetorical lever. He did not call for an end to the division of labour, because that would reduce Britain to the living standards of before the Roman legions, or even to the savage lives led by the ‘Indian’ inhabitants of North America. Also, he was well aware of the pre-commerce age and its own horrors in short-life spans and stunted minds of slaves and tenant farmers and labourers, being connected through his mother’s family with many farmers and their labourers, the latter not being, what you might say, highly educated, with sharp minds and adventuresome from their labours in the fields. It was through the 'propensity to truck, barter and exchange' and the consequent division of labour, that human societies broke out of savagery.

I think it wholly appropriate that Smith’s contribution of the division of labour as central to his report on what made some nations richer than others, in terms of the annual production of wealth, i.e., the ‘necessaries and conveniences of life’. He was by no means the first or only philosopher to identify the role of the division of labour (Plato, Petty, and so on), but he made it a major part of his analysis of the nature and causes of wealth.

It has been questioned by modern economists whether Smith should have centred on the division of labour (Heilbroner, Rothbard, for example). This is mainly because they took the division of labour for granted and did not appreciate Smith’s social evolutionary model of economic change from ‘savagery’ to ‘commerce’.

Mervyn King and Gordon Brown Celebrate Adam Smith

Mervyn King, Governor of the Bank of England, delivered a paper last night at the Adam Smith Lecture, sponsored by the Bank of Scotland (1697), to a audience of about 200 people in St Bryce Kirk, Kirkcaldy (opposite Adam Smith College). I was in the audience to hear Gordon Brown, British Chancellor of the Exchequer, and Mervyn King’s talks, which were both of a high standard.

Gordon brown made one of his typically good speeches, mixing Adam Smith with contemporary political issues, and introducing Mervyn King. He made some slight elisions of the facts, but his delivery style is always splendid. For example, he referred to Adam Smith’s student years as ‘including a few years at Oxford University’; it was six years in fact, twice as long as his 3 years at Glasgow. He correctly reported that Smith did not think much of the educational standards at Oxford, but, in characteristic knockabout form, said that he was glad to welcome Mervyn King because he went to Cambridge.

Mervyn King’s paper was just about right for the audience (I noted another economist present, Gavin Reid, Professor of Economics at St Andrews University, but most others were unlikely to be familiar with Adam Smith’s economics and moral philosophy). This did not prevent King covering elements of Smith’s ‘Moral Philosophy’ – sympathy, impartial spectators, and self-interest – with what Smith would have called, ‘perspicuity’ and a fair portion of sympathy for his audience. He must have been an erudite professor before he became a banker.

With characteristic modesty, King asserted he would leave the question of whether Adam Smith contradicted himself in Moral Sentiments (1759) with his later book, Wealth of Nations (1776), on grounds of the division of labour (his exposition of the division of labour, and the evolution of the role of money, trust, and social institutions necessary for the support of commerce, to put it mildly, was masterly). Coming from a former Professor of Harvard, Cambridge and LSE, this was self-effacing indeed – he was not out to compete with his audience by being obscure.

On one aspect of his talk I was uncomfortable. He seemed to me to be conventionally hazy on the role of self-interest in Wealth of Nations. He alluded to the famous ‘butcher, brewer, baker’ quotation and made the obligatory emphasis of the unreliability of 'benevolence’ compared to the self-interests of the trio of worthy dinner providers. Like most readers, King stopped there and diverted into self-interest being capable of serving society, in my view a wholly inadequate diversion that contributes to the myths of the so-called ‘Das Adam Smith problem’.

Smith’s advice was for the person in search of his dinner to rely on the self-interest of the ‘butcher, brewer, and baker’. Most readers leave it hanging there. The question ought to be put to readers, including Mervyn King: ‘what advice would Smith have given to the ‘butcher, baker, and brewer’ in the same transaction?

The first response I get normally is: ‘Why, exactly the same, they should rely on the customer’s self-interest, too. That’s why self-interest drives these transactions.’

This is not quite half-true, because Smith makes an additional point in the much quoted paragraph, usually ignored by readers. He draws the reader’s attention to the need not to address his own needs or circumstances in the transaction but to ‘address’ the self-interests of the ‘butcher, brewer, baker’:

‘We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages’ (WN I.ii.2: page 27).

I ask again: ‘What is Smith’s advice to the ‘butcher, brewer, and baker’?

It must be the very same as he advices the reader who wants his dinner! The butcher, the brewer and the baker’ are told: “don’t discuss your problems with clothing and sheltering your family, or any of your ‘own necessities’, nor talk to the customer about their ‘humanity’, nor expect them to buy your meat, beer, and bread’ out of their benevolence. Stick to their ‘advantages’ from buying their dinner from you, as your customer talks of you advantages from selling him your products.”

In short, ‘address’ your customers’ self-interests.

Generalising, the advice is that addressing the self-interests of others is the driver of exchange transactions, not the self-interest of self! We serve our self-interest best by addressing the self-interests of others, and that is the harmonising force in societies which ehd iscusses in Moral Sentiments.

This principle in Wealth of Nations is mirrored in Moral Sentiments in the sentence about the ‘mercenary exchange of good offices according to an agreed valuation’ which keeps even fractious soceities together (TMS II.ii.3.2: page 86). If this is understood, then Mervyn King’s, and most other economists' misunderstanding of the driving force of self-interest, would cease to be a problem, and hesitation over dealing with the myth of ‘Das Adam Smith problem’ would disappear (as would regular and convoluted tomes arguing back and forth about nothing).

That is what I came away thinking about after the lecture – and the excellent dinner put on the Adam Smith College. It seemed clear to me. Lost legacy wants to make it clear to its readers (and to Mervyn King).

Sunday, October 29, 2006

Misuse of Adam Smith's Quotations

Irrelevant quotations from Adam Smith do nothing for his reputation and expose, in my humble view, inadequacies in those who resort to them. Ian Martin provides an example that is both unnecessary for his article: ‘This is not the time to start ripping apart our constitution’ in today’s Sunday Telegraph (London), and is logically true but meaningless:

“Adam Smith wrote of cartels in industry: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public." The same can be said of politicians in search of a consensus.”

CommentSmith wrote about Guilds that operated monopolies in towns in 18th century Britain. They covered all the trades working in a town and excluded any person who had not served an apprenticeship from employment in their trades. Smith’s famous quotation referred to these bodies because they raised prices against consumers and held back wealth creation.

They were not cartels in the modern sense, but it is a common attribution today.

His last sentence begins: ‘The same can be said’, which is true as a statement because anything ‘can be said’. The test is whether what is said is applicable to the case the author draws, namely ‘politicians’. I do not think so. Politicians compete for office, even within the same party; the 18th century guilds did not compete; they were monopolies in their silos.

Does the quotation add anything to Ian Martin’s article? Not at all. It fills space, links a dubious argument (more a rant) and scores a ‘recognition’ point for using Adam Smith’s name.

It should also be noted that the guilds did not seek 'consensus'; they enforced their writs by driving out interlopers who had not served a seven-year apprenticeship in the same town, and using legal means (the magistrates were in one of the guilds) to deprive them of a living.

Praiseworthy Labour Productivity

Brian Ferguson, of Canadian Economist Blog, sent me a reference to National Post (Canada) Financial Post section (28 October), containing an interesting article loosely related to Smith’s productive/unproductive dichotomy, perhaps one of his half-finished, if insightful, ideas, and an advance on the Physiocrats’ notion of ‘productive’ and ‘sterile’ labour, supposedly defined by the boundary between agriculture and manufacturing output.

From: ‘Moral Sentiments and MP3’ by Peter Foster, National Post (Canada):“Like the declamation of the actor, the harangue of the orator, the tune of the musician, the work of all of them perishes in the very instant of its production.” Adam Smith: The Wealth of Nations.There's nothing like going back to good old Adam Smith when you need a little perspective on a modern issue. Take music file-sharing.Smith, in the above passage, published in 1776, was discussing "unproductive" labour, a category in which he included churchmen, lawyers and physicians, as well as "players, buffoons, musicians, opera-singers, opera-dancers etc." He contrasted it with the "productive" labour of manufacturers.He did not suggest that singers or musicians (or even buffoons or lawyers) produced nothing of value, it was just that their work didn't result in anything that "fixes and realizes itself in some particular subject or vendible commodity."Fast forward (a profoundly significant phrase) just over 100 years, to 1877, and Thomas Edison's phonograph changed the world of singers and musicians forever.Humans -- and I hope this doesn't shock anybody out there -- are only provisionally moral creatures who show a remarkable ability to justify their actions and interests. This particularly applies to young people, who need to be "socialized" (which means inducted into their society's moral values, not turned into socialists!).Adam Smith noted that we possessed "moral sentiments," but that they need a good deal of social education, and are so imperfect that they ultimately have to be overseen by laws. Despite the wonders of modern technology, that fact hasn't changed at all since 1776.

CommentSmith’s model of labour as a factor in production was relevant for his time and his purpose – what caused net product, or growth in wealth, the production of ‘necessaries and conveniences’ of life? He thought of these as tangible products (food, clothing, shelter, domestic goods and chattels), wrought from nature by labour in combination with the factors of land and stock. In the form of circulating capital they reproduced rent, wages and profit (rewards to the three factors), over and above what they produced in the previous period. The net product was used in the next round – the ‘wheel of commerce’ – to augment the next round’s production. This left many ‘awkward corners’ and gaps, though the model was sound enough on its own terms as a simple growth model.

Unproductive labour for Smith produced consumables that did not reproduce themselves – the domestic servant, etc., - though they enabled productive labour to function, and the class of the idle rich, including landlords and prodigals of all classes, dissipated potentially reproductive capital in frivolous consumption, compared to their productive potential (or opportunity cost) in commerce on own account or by lending to others at interest.

Leakages from the ‘great wheel’ lowered net product and thereby lowered the growth rate below what it could become, but some unproductive labour was inescapably essential (the appropriate roles of government in defence, justice, education, public works and the collection of taxes). And that gave Smith’s analysis his sense of urgency – leakages above the essential (‘without justice society would crumble’, ‘defence is more important than opulence’, and so on) delayed the advance to opulence, including for the overwhelming majority of a people who were trapped in poverty, uneducated in the main, with high infant mortality (2 children surviving out of six or more – 19 for a mother in a Highland village he quoted) and short life spans.

But the contradictions inherent in non-productive, productive in this strictly limited sense were not resolved by Smith (he was, after all, writing in the mid-18th century). After the dead-end of the Physiocrats, he represented a step forwards.

The basic issue is not one of ‘consumed in an instant’, but are these goods and services exchanged at market prices? Smith was before the time when this became an obvious distinction (think of Eltis and ‘Too Few Producers’) and there was no way his distinction could be salvaged in the way he stated it.

However, the generation of net product as the potential source of growth is part of the solution to the problem of his too narrow distinction.

On the last paragraph I quoted from Peter Foster, he shows familiarity with Smith’s ‘Moral Sentiments’. Humans are ‘only provisionally moral creatures who show a remarkable ability to justify their actions and interests’ and ‘they need a good deal of social education, and are so imperfect that they ultimately have to be overseen by laws.’

Precisely! Smith did not assert, unlike his mentor, Francis Hutcheson, who believed that we are born with an innate moral sense, like the other senses. Smith asserted that we develop a moral sense from contact and interactions with adults as infants, school friends as children and contemporaries as co-adults. These are the ‘mirrors of society’ from whom we learn acceptable and unacceptable behaviours, and what is praiseworthy in our conduct. The latter is the ambition of all people imbued with moral sentiments. Mere praise can be a chimera, a false notion.

In this instance, Peter Foster’s article is praiseworthy, as is Brian Ferguson's sending it to me.

Saturday, October 28, 2006

One-sided Self-Criticism of America

Sweeping theories emanating from within the USA on the meaning of its history are always interesting, if sometimes one-sided. I commented the other day on an article in another economist’s Blog, and the comments attached thereto, pursuing the usual bitter critique of British imperialism in Indian history on the treatment of the indigenous Indian population.The gist of the critical comments were about the British record, admittedly not something to be proud about, but so one-sided was it that I quoted a well-known riposte from Winston Churchill, when excitedly question by an American journalist near the end of the Second World War in which she demanded to know what Britain was going to do about the Indians who had been ruled by Britain as a colonial power for over 200 years. Churchill replied to the effect: ‘That after 200 years the Indian population was larger than it had been before, was largely living in the same places they were when the British arrived and were in charge of a large railway system, an indigenous civil service, may of which had been educated at Britain’s best universities, whereas, after two hundred years of US rule the American Indians had been subjected to genocide, starvation and disease and were crowded into small areas of the whole country they lived in when the colonists arrived.’Now, this comparison may have been exaggerated but it contained more than a grain of truth, and it illustrated the one-sided view of the world common in American criticism of the Old World. However, the point I am making is not meant to be one-sided, nor I hope offensive, because much criticism of American (US) history by American authors is also one-sided in the sense that it focuses on the US as if it is unique while ignoring similar traits exhibited by other nations contemporaneously.

Take these extracts from a review of ‘DANGEROUS NATION: America's Place in the World From Its Earliest Days to the Dawn of the Twentieth Century’Robert Kagan (2006), reviewed by David M. Kennedy, published in the Washington Post, 29 October.

Dangerous Nation deals largely in ideas, especially the distinctive assumptions, beliefs and values that have shaped America's singular role in the world. Yet this, too, is in the end a book about power. And it is aptly titled. Americans, he argues, have long worshipped at the altar of Mars, the god of war.

He insists, rather, that the American colonists were themselves grasping imperialists, on fire with aggrandizing ambitions that London refused to support. They chafed especially at the British Proclamation of 1763, which checked trans-Appalachian settlement in a misbegotten attempt to work out an orderly policy toward the Indians of the interior. The American revolutionaries lusted for an empire of their own, writes Kagan, and made war to get it.Kagan says summarily that Adam Smith's 18th-century version of "liberalism" -- by which he means the unfettered "wants and desires of several million free individuals in search of wealth and opportunity, unrestrained by the firm hand of an absolute government, a dominant aristocracy, or even a benevolent constitutional monarch" -- has for 200 years been the mainspring of America's predatory, aggressive foreign policy.

CommentSmith may have been over optimistic about the beneficial effects of commercial society and republican democracy, but he did not pursue his thinking after Wealth of Nations, which was published and revised several times during and after the American War of Independence.

I suggest in Adam Smith’s Lost Legacy (2005) why this might be explained by his concerns that pursuing too strong a sympathy for the American colonists’ case would be risky, given his allegiance to constitutional monarchy (not the same as absolutist French monarchy) and liberty as it had developed in Britain into the supremacy of parliament(A. Smith, Lectures on Jurisprudence, Liberty Fund). In the event his concerns proved justified, especially following the French Revolution (1789) and the outbreak of the French Terror in 1793.

Smith died in 1790 and his friends and sympathizers notably thinned to a small core as the others made their ‘peace’ with the Establishment, still smarting from the loss of the colonies and now literally in fear for their lives in case the British common labourers rose in a French style insurrection. Dugald Stewart, his biographer, eulogist and close personal friend was ‘interviewer by Lord Craig, on behalf of the government, to judge how far Smith’s works could be taken as subversive enough to be disruptive of law and order if the poor were influenced by them.

Smith’s views on empire, wars for trivial ends and the role of ‘princes’ under theinfluence of mercantile-minded legislators, were well known to readers. Stewart was left to moderate, if not emasculate, Smith’s more candid comments as abstruse points of political economy.

Kagan’s thesis is plausible if the view of the world is stuck within the confines of America. All he says about the grasping colonists, thirsting for empire by conquest reads as convincing, except that when you step back and look at the rest of the world in the 19th century, when US expansion was in full flood, which Kagan sees as anything but ‘orderly towards the Indians’, etc., I must remark that his founding of the US ‘imperialism’, loaded with guilt about the indigenous population (as it should be but that’s not my point) misses an important contemporary event elsewhere in the world where the successor population does not suffer the same angst, nor is it predecessor generations gifted with the imperialist energies credited to the equivalent population in the US.

I refer, of course, to the facts that while the US post-colonial revolutionaries were allegedly ‘unrestrained by the firm hand of an absolute government, a dominant aristocracy’, etc., the eastwards expansion of Russia into Siberia and lands to the south was likewise underway, as bloody, as aggressive and as ‘unrestrained’ by its most ‘absolutist government’ and actively encouraged by its most ‘dominant aristocracy’.

There is something missing in historical explanations for US ‘expansionism’ westwards which claims to have found a unique temper in the people who conducted it in America, somehow different from the temper of the people from Russia responsible for Russian expansionism eastwards.

[David M. Kennedy (no relation!) won the Pulitzer Prize in 2000 for "Freedom From Fear: The American People in Depression and War, 1929-1945." He teaches history at Stanford University.]

Friday, October 27, 2006

Michael DeGoyer's Rightful Claim to the October Lost Legacy Prize for Accurate Presentation of Adam Smith's Views

Occasionally, but not often enough, we get a piece that gets close to Adam Smith’s actual views on government – Kirkcaldy Smith not the Chicago version – and it is a pleasure to read them. One such is an unpretentious article’, “In praise of action man” by Michael De Golyer, 26 October, in ‘The Standard’ (China’s Business Newspaper).

“The concept of limited government goes back to political philosopher John Locke. Adam Smith conducted an extensive study of how the concept, applied to trade and industry, led to growth while traditional forms of government- granted monopoly and industrial proscriptions bred economic stagnation.Smith, the first economist worthy of the name, did not say government had no responsibilities. He did not believe that government is best which governs least. That was Thomas Paine, the anarchist. Small and inactive were not Smith's descriptors for good governance.Smith stipulated three areas in which government must act. National security came first. No business could prepare a nation to meet military threats. No business could compel taxes or command people to risk their lives in battle.That was the citizen-dominated state's unique responsibility.

The state must also run the system of justice that made and enforced the law, Smith argued. The main purpose of the system of justice was to ensure the security of property and the person. Without state-enforced property rights, both in real property and in the property of one's body and mind, there could be no incentive for individuals to invent, risk wealth, save money, or build.Simply put, the state must ensure external and internal security of a citizen's life, liberty, and property.And, Smith held, the state must assume projects necessary to the advancement of society and the economy, which were costly beyond the ability of a company to afford or the time frame of investors to expect profits to repay.The cost of education exceeded the ability of most to pay, Smith asserted. Given life expectancies in the Thirties, average family sizes of six or more children, and child mortality rates in the most advanced societies of well over a hundred out of every thousand born, no wonder so few got so little education before the state stepped in.Public health in cities required water and sewer construction and maintenance far beyond the ability of individuals to afford. Nor could businesses expect payback for costs of these facilities in a time frame reasonable to investors as well as affordable to customers.

Small government does not Smithian government make.

This is where the economic laureates' preference for the phrase "positive non-intervention" comes in. It means government acts where business cannot and should not.

Business cannot run courts and incarcerate law-breakers. It cannot take on the full costs of providing education for all citizens, whatever their ability to pay. It cannot make infrastructural investments that require enormous initial outlays and/or take 30 years or more to repay.

But it also means government positively acts to remove barriers to and constraints upon markets. Government has the unique responsibility of protecting and extending market dynamics whenever possible, particularly as technologies and economies change.

What is affordable only to government may and does change.

Further, under positive non-interventionism a government does not substitute its own judgment for that of competitive markets. Regulations and taxes are fully vetted for their effect on markets.Government positively seeks out impediments to markets which intervene in their functioning. The objective is to ensure that market dynamics - producer supply and consumer demand - interact without one or the other having a government- conferred artificial advantage or disadvantage.

This is the essential meaning of justice, a responsibility Smith argued as solely government's. That is why comprehensive, enforceable competition legislation exemplifies true positive non-intervention.”CommentGood, eh? It's brilliant! Note his second sentence:

“Adam Smith conducted an extensive study of how the concept, applied to trade and industry, led to growth while traditional forms of government- granted monopoly and industrial proscriptions bred economic stagnation.”

Absolutely right. ‘Wealth of Nations’ was not a textbook on economics per se; it was his report of his research into a specific topic, namely, how societies grew from primitive savagery to the revived commercial society of 18th-century Britain.

Its so-called ‘digressions’ that some critics read are the data in support of his evidence, a point completely missed by those who read, or rather attempt to read, his books too fast and who have not realised what he wrote about nor its context.

Michael DeGolyer has realized Smith’s project in proper perspective and gets close to his real views on the role of government.

A worthy winner of October’s prize from Lost Legacy!

I invite you to write to him (and The Standard, Hong Kong) to congratulate him for his excellent understanding of Adam Smith’s Legacy at: feedback@thestandard.com.uk and mark for ‘the attention of Michael De Goyer’Michael DeGolyer is associate professor, government and international studies, at Hong Kong Baptist University.

Thursday, October 26, 2006

Love, Money, Greed and Adam Smith

William J. Polley’s Blog (‘Comments and Observations of Economics and whatever else catches my eye’) features this week a lively discussion on ‘Money and Opportunity Cost’ and a side-question about Tim Harford’s (‘Underground Economist’) points about ‘money is the root of all evil’, which I reminded him was more correctly given as the ‘The love of money is the root of all evil’ (I Timothy 6:10; King James Ist; 6th of Scotland transaltion).

This led to comments and somebody called ‘Guest’ (perhaps Beau’s brother?) opined that the ‘better translation was ‘greed’ (from the later Latin translation, not the Greek).

As these Blog comments go, it went into less relevant areas, bringing in Adam Smith too. I suggest you might want to read the original post and the continuing comments at: http://www.williampolley.com/blog/ if only for amusement, plus a little economics.

My most recent post contains:

'A moment before we lose our perspective. ‘Guest’ moves from the statement using a word ‘love’ that we are discussing to a difference in interpretation, calling it ‘greed’, and elides into a definition of ‘greed’, as a ‘rapacious desire for more than one deserves’ to which I asked who decides what is ‘greed’ or what somebody ‘deserves’, to which I am told it is ‘economics’. Funny, I missed that course somehow.

To argue that something stands, ‘given a definition of social costs and benefits’ dodges the issue. Which definition decides that an instance of self-betterment (which could be self-esteem through to frugality as a source for moving into a division of labour and all that followed – including Smith’s arrow maker and the hunters’ transaction in Wealth of Nations) comes under the ‘love of money is the root of all evil’ admonition?

Smith was clear: he applauded the frugal person (particularly the one who saved as his net income rose and invested it or loaned it out at interest) over the prodigal; he applauded the rent payer towards the end of feudal power over the feudal lords, whom he mocked, who spent their sources of power (the ‘rents’ in kind taken from serfs) on ‘trinkets, baubles’ and etc.

In contrast, the urge to self betterment, present in all people, said Smith was a driving force for the transition from savagery toward modern society and, by implication, it would continue to drive commercial society beyond the 18th century. To wrap all of this behaviour under the rubric of a ‘love’ of money, or worse, a ‘rapacious desire for more than one deserves’, belongs properly in a pulpit.

The entrepreneurial urge resides in individuals, not the mass of others who have views on what they deserve – roughly what they have got – until the entrepreneur shows in markets what they could also have, which awakes a desire to better themselves.Smith’s verbal tirades against the super rich were directed not at their richness, but at their use of it for trivial ends. He bemoaned too, the futile urges that drove the son of a poor man to extraordinary ends extremes of self-betterment. That is part of the rich inheritance he left in his books and lectures, which unfortunately sometimes gets lost in salvoes of quotations and counter-quotations from his remarkable life’s work.

Wednesday, October 25, 2006

Joseph Epstein on a 'Vision' Smith Never had

Snippet from the Wall Street Journal (the rest is behind the ‘subscription only' wall):

“Joseph Epstein, in his Oct. 19 editorial-page essay "Ugly, Thorny Things," places facts in opposition to ideas (wherein he emphasizes vision). He notes that "the more facts one has at one's command, the less is inspiration for ideas likely to arrive." He correctly states that the factual knowledge we have acquired contradicts Marx's class struggle vision, but then incorrectly suggests that the depredations of corporations such as Enron contradict Adam Smith's vision of the invisible hand.”

Comment1 Adam Smith never had a ‘vision’ of ‘the invisible hand’, at least he never published that he had such a notion.

2 He referred twice to ‘an invisible hand’, as a metaphor not a 'vision' or 'theory', once in Moral Sentiments and once in Wealth of Nations, not to ‘the invisible hand’. His reference in his History of Astronomy to 'the invisible hand' of Jupiter (the Roman God not the plannet) was a comment on pagan superstitition.

3 Enron, and other criminal activities, do not contradict anything Adam Smith said about commercial activities nor anything about the motivations of people. He regarded justice as a most important part of the edifice of society (Moral sentiments), without which it would ‘crumble’. The trial and conviction of some Enron employees is wholly consistent with his report on how societies create wealth (annual production of the ‘necessaries and conveniences of life’). Some ‘merchants and manufacturers’ engage in illegal, and quasi-illegal activities, such as bank fraud, oppressive actions, including violence, and they lower the net creation of wealth. Justice requires their punishment.

They also lower the creation of net wealth when they engage in monopoly and other conspiracies to raise prices - he recommended firm action to stop this behaviour by governments changing their policies.

If anybody would email a copy of the relevant paragraphs on Adam Smith in the WSJ article for my personal use, not reproduction (copyrights!), I would be obliged.

Tuesday, October 24, 2006

Adam Smith, Muhammed Yunus and Osama Bin Laden

I read an Egyptian Blog called the ‘Big Pharaoh’ daily and for a commentary of the usual stormy and violent world of the Middle East it is magnificent. I do not know who writes it but he is a voice of sanity in what is a depressing region with depressing conflicts.

“"There is a difference between an investor and a destroyer, a bomber and a constructor, between those who respect human rights and preserve human integrity, and those who kill innocent people cold-bloodedly, spreading fear, panic and poverty among human beings, causing people to lose sleep, and destroying their lands. I thought about these dissimilarities when the Bangladeshi Muslim Muhammad Yunus won the Nobel Peace Prize. He is the founder of the Grameen Bank, established to help the poor, in an effort to bring civilizations, religions and human beings closer to one another, so that they can live in peace.

"At the opposite end of the spectrum, there is what Osama bin Laden does. He is still hiding from one cave to another, planning how to blow up, destroy and kill; he has introduced the idea of suicide bombers, has founded a terrorist organization, and he does not differentiate between killing a child, a widow, or an elderly.”

CommentThese are the two choices humanity has faced for millennia. Smith wrote about them too. Violence can distribute the bounties of nature and the fruits of labour but it never creates either. 'Plunder or trade?' (an original Prisoner’s Dilemma) were the knife-edge choices for every human and proto-human group that came in contact with another. For hundreds of millennia the choice was fragile, eased somewhat because the habitable world was vast and the hominid or human populations were tiny, and making contact was intermittent among different groups. Mostly, the ground you walked on was within your whole life-time boundaries and close to the only people you would ever know.

When Smith lectured at Glasgow College during1751-64, he identified as fundamental the propensity for humans to ‘truck, barter and exchange’. He speculated, in line with his social-evolutionary approach, that this propensity was ‘slow and gradual’ in leading towards ‘opulence’, and was ‘probably the necessary consequence of the faculties of reason and speech’ and the ‘principle to persuade’. With these thoughts he opened ‘Wealth of Nations’ (WN I.ii.). Modern research has fleshed out much of what his ‘conjectural history’ asserted. If you have time only for one book to read, I recommend Steve Mithen, ‘After the Ice: a global human history, 20,000-5,000 BC’, 2003, Weidenfeld & Nicholson. This provides a running account of hundreds of human societies across the globe over a common period. If you have time for two books, I recommend Chris Stringer, ‘Homo Britannicus: the incredible story of human life in Britain’, Allen Lane, 2006. This traces, inter alia, trading links across Europe with its north-western peninsular before it became an island.

Any economist without any knowledge of how humans in their societies organized their subsistence from the end of the last Ice Age and who derives his or her assertions about human behaviour based on the assumption of ‘selfishness’ pureed into mathematical functions is, in my humble view, seriously deficient. Either or both these books written by two of Britain’s eminent social scientists are a good place to start, or, of course, their equivalents where you live. Then go back to your copies of Smith’s Lectures on Jurisprudence, Wealth of Nations and Moral Sentiments (all from Liberty Fund) before you next assume anything about human motivations.The short report by Big Pharaoh from the pan-Arab daily, Al-Hayat, says much about human choices, which no doubt in my mind, could have been said at every step of the long road from the first contacts between long separated small hominid and human groups a million or more years ago.

Monday, October 23, 2006

Lord Harris - pioneer of economic and freedom's revival

William Rees Mogg, former editor of The Times, writes a short appreciation of Ralph Harris, who died last week, and it is worth reading as an account of an intellectual struggle for sets of ideas, representative of the post-war years, which will find an echo with people who lived through those decades, and it is also an appropriate text for those who matured in the 1980s onwards and probably regard the period 1940-1990 as a foreign hinterland.

“The man who saved Britain: Ralph Harris gave Thatcherism its intellectual foundation — and ended the nonsense of Fabianism” by William Ress Mogg

IDEAS SHAPE the world. Last week a very important promoter of ideas, Ralph Harris, died at the age of 81. The liberal economic ideas that he popularised in the 1960s and 1970s became the basis of the Conservative reforms of the 1980s, and have remained the accepted basis of the Blair administration.

His central belief was that a free society can survive only on the foundation of a free economy. He also believed in classical economic theory. He was an Adam Smith man through and through. Most economic theory then taught in universities was Keynesian; industrial policy was based on nationalisation and trade union power. Wartime regulations were still universal; rates of taxation went up to 90 per cent or higher. This was the triumph of the managed socialist economy in a democratic society. The left wing of the Labour Party still looked to the Soviet Union as the socialist pattern of industrial development; many leftwingers assumed that Soviet socialism was going to bury the less well organised economies of the West, including that of the United States.

Ralph was not himself a creative analytical economist; where Keynes had been a propagandist for his own ideas, Ralph was largely a propagandist for the ideas of others. In this, his methods were closer to the Webbs than to Keynes. He had taught economics at St Andrews; he believed in the classical tradition, in Adam Smith, Ricardo and the Liberal School.

In the 1960s and early 1970s the IEA moved from the fringe to a position of rising influence, largely as the result of the failure of economic controls. Many free-society pamphlets were published, brilliantly edited by Arthur Seldon. Meetings were held, lunches were given and Hayek and Friedman were introduced to a new British audience. The IEA became a focus of criticism when the Heath Government did a U-turn and tried to fight inflation by price and wage controls — by a policy that I was ignorant enough to support. What folly that now seems.

Ralph Harris was a very likeable man who knew what he believed. He did not invent the ideas of a free society based on a free economy, but he did convert the British establishment from Fabianism to Thatcherism. His ideas — put into effect by Mrs Thatcher in the 1980s — saved Britain from the decline of 1960s and 1970s. The ideas that the IEA was advocating in the 1970s provided a large part of the intellectual basis of the Thatcherite revolution. He deserves a statue: he helped to save the freedom of his country.'

CommentI never met Ralph Harris. If I had in the 1960s I would probably have disagreed with him. That was the decade of the high tide of Keynesianism in university teaching of economics. The ideas of Milton Friedman and the monetarists were making their way steadily across the political landscape and governments, both labour and conservative, were wrestling with how to make inflation and Keynesian work. Once governments found that they could pump demand into a near full employment economy (remember full employment was the consensus goal of governments then), they also created the basis for lack of industrial discipline manifesting itself in strikes for more pay and for more subsidies to keep bankrupt firms and nationalised industries open, despite the so-called ‘full employment’ which had more vacancies chasing the unemployed than ever before. It couldn’t last and it didn’t.

Though I never met him I met people who had, and I bought copies of the Institute of Economic Affairs pamphlets. I did meet William Rees Mogg once at a private interview in Glasgow in the late 70s, when we discussed prospects for Scotland and England if there was a breakthrough for the Scottish National Party (he was then editor of Times). He struck me as a patrician figure from the English upper class. The meeting was well mannered and pleasant, and he seemed disappointed to hear that the SNP was unlikely to settle for something less than devolution. It did eventually, of course, but there seemed no point in speaking frankly of these matters to someone I hardly knew on a personal level.

Since then I have commented on Lost legacy on remarks William Rees Mogg has made about Adam Smith, particularly on his recommendation that the ‘best’ edition of Wealth of Nations was the sixth edition by William Playfair(1806), which most Smithian scholars would say was among the ‘worst’ editions because of Playfair’s editorial insertions into Smith’s text.

Among Ralph Harris’s notable background pointers is the fact that he taught at St Andrews University, which was also the alma mater of several prominent leaders of the Adam Smith Institute. You should visit ASI at: http://www.adamsmith.org/blog/, a daily Blog (plus its many other activities) that is well worth book-marking for daily visits for news of its tireless campaigns for the set of ideas initiated by Ralph Harris and the IEA.William Rees Mogg’s account of the 1940s and 1980s strikes a chord. As does his statement that ‘where Keynes had been a propagandist for his own ideas, Ralph was largely a propagandist for the ideas of others.’ Others beside Keynes were advocating similar ideas around the same time (some governments were already ‘guilty’ of the Keynesian trap of pumping money into a flagging economy, often in pursuit of ‘national glory’). Keynes’ contribution was to give the policy a coherent theoretical basis (‘The General Theory’; it was still a set text in economics courses in the early 1960s).That ‘[Harris] believed in the classical tradition, in Adam Smith, Ricardo and the Liberal School’, for me is problematical, not in the sense that Harris did not believe this, but in the sense that I think lumping Adam Smith as a ‘classical economist’ is an accepted shorthand to place him somewhere but it is also a major error of attribution. Smith was not an economist of any school; that he is described so is promiscuous. He was a moral philosopher imbued with a great sense of history from Roman and Greek civilisation to the end of the interregnum (5th to 15th century) following the Fall of Rome (476), and the recovery of the age of commerce in 17th- and 18th–century in Western Europe.His interest in political economy sprang from a fairly narrow, but highly important, perspective in his research into what caused the wealth of nations, defined as the growth in the annual output of the necessaries and conveniences of life (GDP). He linked (hence the many so-called 'digressions') this theme to the political and constitutional changes of the establishment of Liberty in Britain, the institutions of Britain (religious, ‘great orders’, its history and global activities, including the American Colonies, East India and other chartered trading companies) and the mercantile policies pursued by governments, how markets worked, how capital accumulated, the role of currencies, and the raising and spending of taxation. Wealth of Nations was not an economics textbook; it was a report of his researched findings (a ‘one man Royal Commission’). This places Smith outside the ‘classical economists’ box of Malthus, Ricardo, and Mill, to which should be added Cantillon, Turgot, Tucker and, perhaps, Petty. Wealth of Nations is a companion to Moral Sentiments and to his Lectures of Jurisprudence. It contains many ideas that were not original to Smith but the synthesis of these and other ideas were original to him.

None of this scholastic quibble takes one iota away from the life’s work of Ralph Harris. If William Rees Mogg speaks well of Lord Harris, then I am inclined to go along with his judgement too.

Friday, October 20, 2006

Grounds for Agreement on Policy

I agree with quite a bit of the economic assessments of some Austrian economists (though I seem to have problems with Mises.org’s interpretations, and sometime outright errors, of the work of Adam Smith). A typical case of agreement is shown in an posting by Peter Boetteke of Austrian Economists:

“I am thrilled for Yunus and hope this will bring renewed attention to the plight of the underdeveloped world and the policy options needed to address the issue of extreme poverty. I do hope that the media attention will not use the occasion to endorse the grand plans that have been proposed by Jeff Sachs and others to "end world poverty" just because they sound good and obviously are well-intentioned. Sachs has a lofty goal no doubt, but one that will cause great misery if not pursued with humility and respect for local conditions. So rather than allow the attention brought by this prize to Yunus's great innovation to help the worlds poor to embolden the social planners and would-be saviours of the world to pursue their grand designs, the work of thinkers such as P.T. Bauer and William Easterly should be remembered. The path to development, as Yunus's micro-lending demonstrates, starts with small scale trading and indigenous entrepreneurship” (Sorry: some typos and US spelling modified).

Read Peter Boeteke at: http://www.austrianeconomists.typepad.com/The last sentence is pure Smithian (i.e., Lectures in Jurisprudence and Wealth of Nations). Smith primarily was about origins – the ‘nature and causes’, etc., - and less about how an economy operates in the equilibrium conditions on neo-classical-type economics, and an age away from the central theorem of Chicago economics with its emphasis on individual self-interest (indeed, the ‘granite’!, according to George Stigler).

On how commercial economies develop (historically and today in the poorest parts of the world) we have clear agreement.

Mandeville was a Predecessor Not a Precursor of Adam Smith

Mark Thoma over on Economist’s View provides a helpful service to economists generally with his publishing of ‘The Grumbling Hive: or Knaves Turn’d Honest’, a poem by Bernard Mandeville (1705).

Visit his interesting Blog at: http://economistsview.typepad.com/economistsview/ and scroll down. You’ll find the poem in full. It is worth reading if you have not got any editions of Mandeville’s (1670-1733) famous book, The Fable of the Bees, or: Private Vices, Publick Benefits (1714). You can get a low priced 2-volume edition of it from Liberty Fund.

Why is it important? Well, read the following from Mark Thoma:

“In 1714, Bernanrd Mandeville published The Fable of the Bees: or Private Vices, Publick Benefits in which he suggested that private vices that were at odds with the moral code at the time would, if practiced by all, result in the greatest public good. Behaviors such as selfishness, greed, lavish consumption, and acquisitive behavior are necessary for a thriving and industrious economy. Thus, The Fable is often seen as a precursor to the idea that allowing individuals to pursue their self-interest without interference will result in the greatest common good.”

CommentSound familiar? Yes, Mark has found the source of the nonsense normally attributed to Adam Smith in the Chicago version of what Smith was allegedly about. (In what follows I do not criticise Mark Thoma for other people's interpretation of his comments.)

Readers of Moral Sentiments (TMS VII.ii.4.114: p 306-14) will know the extent to which Smith criticised Mandeville’s view of human behaviour and its alleged consequences. His mentor, Professor Francis Hutcheson lectured strongly against Mandeville’s theory of private vices, as was to be expected from a moderate protestant Church minister, but Smith went deeper and criticised the idea that people being selfish would necessarily achieve social benefits – a wholly erroneous ideas nurtured by the epigones of Chicago in their infusion of self-interest in neo-classical economics.

That there is an association in the minds of some, who read too fast, between Smith and Mandeville is hinted at by Thoma in his statement that Mandeville is 'often' een as a ‘precursor’ of the idea that ‘allowing individuals to pursue their self-interest without interference will result in the greatest common good.’ As a view of a possible interpretation of Mandeville, I have no quarrel, but in so far that readers (moving too quickly again) interpret this statement as a view in common with Smith’s actual position, I admit to a most strenuous objection.

Self interest (undefined) can and often does drive individuals to act against the ‘common good’. When merchants and manufacturers strive for monopolies they act in their self interest; so do criminals, and so do spoilers of the ‘commons’, and so. By no means is it the case that self-interest is always necessarily benign (remember there is no invisible hand beyond the metaphor that applies on certain cases but not in all).

The problem lies in the definitive ‘will result in the common good’, not even ‘may result’ or ‘might result’, but ‘will result’, no doubts about it! For a scholarly refutation of the notion that Mandeville was a ‘precursor’ of Smith’s views on self-interest and any suggestion that in Smith there is any notion that self-interest or Mandeville’s ‘selfishness’ ‘will result’ automatically for the common good, see Pierre Force, Self-Interest before Adam Smith: a genealogy of economic science, Cambridge University Press.

So, when people assert that self-interest leads individuals to act for the common good – the central theorem of neo-classical economics – it may produce impressive results mathematically and Mandeville’s poem may provide amusing literary comfort too, but neither describes the reality as outlined by Adam Smith. Of course, it could be Adam Smith was wrong (I think he was right) but what is not right is to associate Adam Smith with the central theorem of neo-classical economics.

Chicago Adam Smith is Bernard Mandeville in drag, dressed up in clothes that do not belong to him, nor do they fit him.

Thursday, October 19, 2006

Adam Smith and the Grameen Bank

A most thoughtful and stimulating article from Andy Mukherjee, “Nobel for Yunus Is Not a Defeat for Adam Smith, on Blomberg.com on the Nobel Peace Prize awarded to Muhamad Yunus was a pleasure to read today. Not because I agree with all of it – I do not – but because it raises issues that enable me to present Adam Smith’s views not limited to my regular critiques of the errors of his Chicago epigones, the creators of the muddle which has come to dominate the perceptions of economists.

Andy Mukhargee is burdened with trying to defend Adam Smith, or rather a version of him, by showing that Muhamad Yunus and his Grameen bank works within a modern capitalist framework while linked to ideas of Adam Smith. This seems a small problem of interpretation but it is actually a major issue of intellectual accuracy, given that what Smith actually wrote is wholly consistent with the Grameen initiative within its own corpus and it does not require manipulation of Chicago’s ideas about Smith to relate it to capitalism, a 19th to 21st century phenomenon. On the contrary, it requires the education of those imbued with Chicago’s version of Adam Smith as a theorist of capitalism, which he wasn’t.

That this is necessary can be seen in Andy Mukhargee’s final sentence: ‘Making room for Adam Smith's invisible hand will eradicate poverty faster for a greater number of people than creating clones of Grameen Bank.” His essay shows he is informed of the obstacles for the poorest to capital, which I shall discuss momentarily, but it also shows he is deficient in understanding from where Smith was coming when he researched, lectured and wrote in 18th century Scotland, about an economy roughly where much of the Third World today is at for the poorest end of the income spectrum.Kirkcaldy Smith, unlike the Chicago version, knew nothing of the capitalism that was nearly a century away in the future with it impressive development in economics and technology, with most of the latter still on a distant horizon. Smith spent his intellectual life ‘looking backwards’, in Samuel Fleischacker’s memorable phrase, not forwards to what was to follow the relatively primitive commercial economy of his time, which he chose to inquire into for his report of what caused nations to move towards ‘opulence’. He did not write a textbook on economics and the economics that he did write about would barely fill half-a-semester of an undergraduate theory course today.

His conjectural history of society’s development began when humans were extremely poor (hunter gatherers), had little scope for the propensity to ‘truck, barter and trade’ and had hardly any division of labour. Their problem was access to ‘stock’, i.e., the saving of resources, mainly in provisions, to undertake production cycles longer than a few days.

Cutting a longer story short, until the three elements of the propensity to bargain, the division of labour and the accumulation even of minute amounts of stock occurred together, markets will not grow and people will be forced to live hand-to-mouth, which was the normal condition of human kind for hundreds of millennia back amongst the hominids. Of course, other habits are also important for the nascent steps to development can take root and allow it to flourish, among these Smith highlighted a sound system of justice, a predilection for trust and a widespread ‘mercenary exchange of good offices’ (i.e., reciprocation).

In many societies within a modern capitalist world, where the same three conditions operate only at the most primitive level, poverty is endemic. Now Smith lectured about all this from 1751-64 at Glasgow University (see his Lectures in Jurisprudence, Liberty Fund). He was thoroughly conversant with this social evolutionary model of development, as those should be who express views as to how much or little the Grameen Bank activities conform to Smith’s works.Smith observed that human societies had passed through Four Stages, namely, hunting, shepherding, farming and, ‘at last’, commerce. As a classical scholar he was well aware – even more than normal – of the impact on Western Europe of the Fall of Rome around 476 and the destruction of commercial markets under the regimes of barbarian shepherd societies (thus his admonition that ‘defence was more important than opulence’).

The first full cycle of development came to an end in the West (it lingered on in the Eastern Empire for a millennium, then collapsed – about the time it revived again in the West). His Wealth of Nations addressed how certain countries in Europe were reviving and were back on the road to opulence, and what might be done to encourage these developments because, among other benefits, they would also relieve the very poorest from their abject poverty.

Place Muhamad Yunus in this Smithian context and we seen how close he is to Adam Smith, not how far away he might be. He certainly is far away from Chicago’s neo-classical version of Adam Smith; but he is a main player in Smithian economics.

The poor have no ‘stock’ (using Smith’s contemporary word for what we call capital). Moving from an absence of stock to a minimal amount sufficient to begin frugal accumulation in the rounds of the ‘great wheel of commerce’, requires efforts beyond the reach of most people on the fringes (though they may be a majority in some societies today) of a country developing its economy only in parts. With no property, they have no collateral for bank loans (and didn’t have in the mid-18th century). Banks were also forming in Smith’s day and it was not always a straight-forward process even then (as he reports in Wealth of Nations in the evolution of currency, bills, bonds, and fractional lending, etc.).

The experience of Grameen Bank is that by lending small sums to groups under local conditions that maximise trusting behaviour in close relationship units, the primitive accumulation of stock may be initiated. That is a pure Adam Smith thinking. This is not to discredit the measures that Andy Mukhargee envisages in developing credit terms, collateral for lending and so on; it puts it in context.Unfortunately, Andy Mukhargee spoils his account completely with his last sentence: ‘Making room for Adam Smith's invisible hand will eradicate poverty faster for a greater number of people than creating clones of Grameen Bank.”

I won’t rehearse my oft made remarks about the Chicago myth of ‘the invisible hand’. But simply say: ‘No Andy. There is no invisible hand in the development of markets, and Smith did not say so either. But first read his ‘Lectures in Jurisprudence’ and then the early chapters in ‘Wealth of Nations’, and reflect on what the Gameen Bank is doing.

Wednesday, October 18, 2006

A Corrective Posting on Wikepedia

Looking up Wikipedia on Smith's metaphor of 'an invisible hand' I found an entry as below, to which I posted the brief note that follows. As it may be amended by Chicago trained economists I thought I would also post it on Lost legacy for the record.Wikipedia entry:'The idea behind the first welfare theorem goes back at least as far as Adam Smith's The Wealth of Nations. Smith argued that an unfettered market economy composed of self-interested consumers and firms could achieve an allocation of resources and goods that was socially efficient, as if an invisible hand were guiding the actions of individuals toward a state of affairs beneficial to all.'My post:This statement may be correct in itself in so far as it refers to a theorem in modern Welfare Economics but it is incorrect in so far as it refers to Adam Smith. It conflates several presentations of Adam Smith's ideas, mainly associated with neo-classical economics - if you like, the Chicago version of Adam Smith, but no the Kircaldy Adam Smith.

Nowhere in 'Wealth of Nations'does Smith assert the theorem linking an'unfetered market economy' to 'an invisible hand'. His reference to 'an invisible hand'(WN IV.ii.9: page 456) was not a statement about markets, efficient or otherwise, 'fettered' or unfettered; it was a metaphor about the consequences of unintentional actions of individuals - in the single case of merchants considering the security of their capital - having unintended (by them) consequences, in this case of leading to higher economic benefits for the home country than lowering net capital savings by the amounts that would otherwise be shipped abroad.

In short, there was no theory of markets associated with 'an invisible hand' (and neither did he use the expression 'as if' before 'an invisible hand'). The linkage of the metaphor to a 'theory of markets' is an interpolation of modern teaching and not what Adam Smith wrote. He did not invent the metaphor; it was used earlier by Shakespeare in Macbeth, 3.2, and by Defoe in 'Moll Flanders', and others too. He analysed how markets worked in Chapter VII of 'Wealth of Nations' in respect of 'natural' and 'market prices' and did not need to add to his analysis with a separate metaphor.

Myopic Marxists and Adam Smith

In contradistinction to last years claims that Marx was more popular and revered by the general listening public than Adam Smith from a British Marxist, another mMarxist from a different Chuurch of Marx laments the fact that nobdy considers Adam Smith's ideas to be as dead as most people consider Karl Marx's.“THE REPORTS of my death,” wrote Marx Twain, “are greatly exaggerated.” The same could be said of Marxism as a body of ideas.Marx of course died long ago--1883 to be precise. The economist of the free market, Adam Smith, died almost a century before that, in 1790), yet, curiously, there are no books announcing that “Smithism” is dead.”So writes Paul D’Amato, ‘Not a dogma, but a guide to action’ (20 October) in Socialist Worker online (Chicago, Illinois)(http://www.socialistworker.org/2006-2/606/606_13_Marxism.shtml)

CommentMarxists always have a problem with Adam Smith, while everybody has a problem with Marxists, especially those who have lived or still live under the heel of Marxist regimes and within economic systems influenced by his philosophy.

Truly, when he asserted that the role of philosophers was not to interpret (understand) the world, but to change it, his true believers managed to do so by changing the world into a seriously worse place for everybody in it. They see Marx as a ‘guide to action’, which they pursue with a vengeance against the people, including other supposed Marxists, whom the hate with unhealthy degrees of apoplexy, and kill when they are in power.

Smith preferred to try to understand the world and foreswore any ambitions in changing it other than by presenting his book on The Theory of Moral Sentiments and his report of An Inquiry Into The Nature and Causes of the Wealth of Nations, for consideration by those inclined to read them.

He railed against the ‘men of system’, wise in their conceit, who believe (and how they believe!) that they, and only they, know what is best for others and, in the face of timorous doubt and other bourgeois errors among the people, they would dam well ram it down everybodies throats – cut them if they have to – in the cause of, er, what?

There are “no books announcing that ‘Smithism’ is dead” because he didn’t cause the deaths of tens of millions at the hands of the thousands who trampled over them in pursuit of his utopia. He didn’t ask for anybody to follow him, anybody to impose their ideas on others, nor did he create a religion out of their worship of him.

He simply said here are the consequences of following mercantile and monopolistic practices, here are the consequences of fighting for empires and here are the consequences of a lack of freedom and justice - now you choose.

Wicked Error from Wikipedia?

Wikipedia is an interesting concept – I contributed something on it years ago - and I should take some trouble to offer some more pieces on Adam Smith. Look at what Shane Schick, presumably familiar with Wikipedia, writes in Buisness.ca (Canadian Technology News) under the title: ‘‘It takes two to Wiki: Citizendum may offer the double-check that Wikepedia lacks’ (17 October):

‘Until recently, Wikipedia’s philosophy seemed not far removed from economist “Adam Smith. Just as Smith believed the “invisible hand” of the market would keep the forces of supply and demand.’CommentThe fact that Adam Smith did not believe, nor did he assert, that he ‘believed the “invisible hand” of the market would keep the forces of supply and demand’.

Where does Shane Schick get such notions from? Hopefully, not Wikipedia – I will check to see what Wikipedia says – because its credibility would become questionable.

Tuesday, October 17, 2006

John Tierney Does a Bastiat!

The best comment I have read so far on the Nobel Peace Prize going to Muhammad Yunus for his Grameen Bank is penned by John Tierney of the New York Times (17 October).

He puts a fresh slant on it and takes on the ‘professional’ aid lobbyists who, despite 50 years of failed policies, still hanker after making poverty history by unintentionally perpetuating it. They are anti-market to boot, the one proven method of development from grinding poverty of 18th century Britain, 19th century Europe and America, and 20th and 21st century Asia. Presently that leaves Africa to the mercies of bandits, thieves and boss men, and South America to enoy the doubtful virtues of Right and Left tyrants.

“The Grameen Bank has done more than the World Bank to help the poor, and Yunus has done more than Jimmy Carter or Bono or any philanthropist.But has [Muhamad Yunus] done more good than someone who never got the prize: Sam Walton? Has any organization in the world lifted more people out of poverty than Wal-Mart?The economist William Easterly … calls the bank’s prize “a victory for the one-step-at-a-time homegrown bottom-up approach” to development. That approach is a welcome contrast to the grandiose foreign-aid schemes that do more harm than good.

Making toys or shoes for Wal-Mart in a Chinese or Latin American factory may sound like hell to American college students — and some factories should treat their workers much better, as Strong readily concedes. But there are good reasons that villagers will move hundreds of miles for a job.

Most “sweatshop” jobs — even ones paying just $2 per day — provide enough to lift a worker above the poverty level, and often far above it, according to a study of 10 Asian and Latin American countries by Benjamin Powell and David Skarbek. In Honduras, the economists note, the average apparel worker makes $13 a day, while nearly half the population makes less than $2 a day.

Some of them prefer to keep farming or to run small local businesses, and they’re lucky to get loans from the Grameen Bank and its many emulators. But other villagers would prefer to make more money by working in a factory. If you want to help them, remember the new social justice slogan proposed by Strong: “Act locally, think globally: Shop Wal-Mart.”

CommentNote the reference to ‘the one-step-at-a-time homegrown bottom-up approach’, a pure Smithian approach to development. Forget all the guff about ‘balls-breaking capitalism’, so-called ‘laissez-faire’, minimal government, imaginary invisible hands masquerading as theories of markets, and other errors from Chicago’s version of Adam Smith.

Such interpretations bury Adam Smith’s social evolutionary model of how societies develop from ‘savagery’ (the human and proto-human state for two million years) towards civilization through shepherding, agriculture, and (‘at last’) commerce.

It was the slow and gradual process from the human propensity to ‘truck, barter and exchange’ and the division of labour, that led to the discovery of capital stock and then, from a slow and gradual accumulation of capital and knowledge of science and technology, to mass consumer societies on a scale never before seen on the planet.

Affluent onlookers of the realities of development – what their own predecessors went through – who try to ‘speed it up’, ‘humanise’ it with their ‘compassion’, usually makes things worse or at best leave them as they are.

The ‘sweat shop’ kids who, under pressure from anti-globalist campaigners, lose their jobs that pay them and their families a few dollars a day, and are forced them to revert to their earlier prostitution and ‘rent boy’ careers instead. I read other day of why a Vietnamese woman worked in a foreign factory even at a few dollars a week – because the alternative for her and her children was 18 hours a day in the fields scraping her living.

To right social wrongs requires capital from wealth creation processes, not pittances plus ‘pity’ from people living in the richest countries in the world, who bleat about ‘lost US/UK jobs’, whose politics perpetuate high subsidies to farmers that prevent developing country farmers from selling into their markets and who denounce ‘free trade’ under the guise of ‘fair trade’ (Jagdish Bhagwati).

John Tierney hits a sensitive target in his comments on the opponents of Sam Walton and Wal-Mart (often the same people who oppose imports from developing countries). Wal-Mart a force for making poverty history? It’s lovely! It’s beautifully ironic! It is in the great tradition of Bastiat! Congratulations John Tierney and The New York Times!

This takes nothing away from Muhammad Yunus and the Grameen Bank in lifting poor people out of poverty by helping them to be become wealth creators, while Sam Walton helps poor people in the richest economy in the world raise their real incomes by importing the products of poorer people further up the development ladder in poor countries.

What the developing world needs is many more activists like Muhammad Yunus and Sam Walton and fewer following the lead of Bono and Gedolf (except in music), if the transformation to economic development is to materialize for the poorest people on Earth.

Monday, October 16, 2006

A Mistake We Should Not Make

Of the many famous, oft quoted, paragraphs in Smith’s Wealth of Nations, the bit about the lack of ‘benevolence’ among ‘butchers, Brewers and bakers’ is among the most popular. It is also widely misunderstood.

Andrew O. Morriss, Professor of Business Law and Regulation, Case Western Reserve University School of Law in Cleveland, writes in the Charlotte Observer, North Carolina:"Businesses that do, prosper and grow. Businesses that don't, go out of business. That simple test has had amazingly powerful results, producing goods and services that have enabled hundreds of millions of people today to live lives filled with wealth unimaginable even to royalty as little as a hundred years ago.How was all this wealth created? Adam Smith said it best in 1776 when he wrote in "The Wealth of Nations" that, "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest."Markets harness self-interest to the good of all by rewarding those who meet human needs. It is too easy to forget that the natural state of humanity for millennia was poverty and that only recently have we stumbled on the institutions that enable all of us to escape from lives of hunger, disease and cold to a world so full of resources that a major problem facing the poor in America is obesity.

If we are all to have dinner tomorrow, we need to heed Adam Smith's advice and keep the politics out of today's business."

CommentYes, but don’t leave it there, for that misses an important element of Smith’s reference to the ‘butcher, brewer and baker’ much quoted paragraph (WN I.ii.2: p 26-7).

At the moment when you are seeking your dinner and not relying on their benevolence, you still haven’t got your dinner, as Smith makes clear if you read on.

‘We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.’ (WN II.ii.3: p 27)

In other words, we achieve our self-interest only by addressing the self-interests of others, and what is true for us is true for others. The butcher, brewer or baker does not tell us that we should buy their products because of their needs, their interests, they tell us about how their products, their meat, beer and bread will give us the bestest of dinners, the most wonderful nutrition, the joy of culinary delights and years of good health and happiness, etc. (OK, I exaggerate a little, but it’s called selling by appealing to the customer’s ‘self-love’ and self-interest.)

Now almost all Chicago trained economists miss this point and blithely quote Smith as if he never uttered another word, and from which they construct theories of self interest as if that is all that drives human behaviour in markets. Smith’s message was that it isn’t all there is. Gecco got it wrong, or at least the script writer did, when he wrote ‘greed is good’.

If bargainers solely concentrate on themselves and their self-interests they would hardly ever reach agreement until both parties are starving, one of them gives in, or they use force, none of which are conducive to social harmony. It’s not our self interest that drives markets through bargaining but the mutual mediation of self interest from each party to the transactions of life by addressing the interests of others.

Smith never made the mistake of stopping at only our own self interest. Neither should we.

Invisible Hands Again

A curious piece by James Rose, editor of www.corporategovernance-asia.comHis theme is that what he calls ‘neoliberalism’ is alive and well in China but under siege in the US, and that its precepts about free markets are really a political choice not solely an economic one. China is making that choice, pragmatically, while the US is slipping into ideology.

He writes:

“Neoliberalism, also known as neoclassicism, is generally considered to be characterized by the belief that markets should be open and uncluttered. They should move in the grip of Adam Smith's invisible hand - the collective wisdom supposedly generated by the market - and should not be influenced by non-market actors such as governments or civil groups. So, how does China, an authoritarian society, run by a highly meddlesome communist government, qualify to be considered neoliberal?”

From the The Standard (China’s business newspaper), 16 Oct Hong Kong.

CommentStatements that markets should move ‘in the grip of Adam Smith’s invisible hand’ are, of course, risible. Rose also defines as ‘the collective wisdom supposedly generated by the market’. This is a curious statement.

I like the ‘supposedly’ qualification – because nowhere did Smith link ‘an invisible hand’ to markets. The myth that he did is from the Chicago version of Adam Smith, who has little in common with the Kirkcaldy original Adam Smith.

Where this leaves the theory of political choices over economic, I cannot fathom.

A Reviewer Who Has Read Moral Sentiments

A review of a book, ‘Understanding Institutional Diversity’, (Princeton University Press, 2005) by Professor Elinor Ostrom, Arthur F Bentley Professor of Political Science at Indiana University by Professor Richard Wagner, of George Mason’s University, includes an example of the correct use of Adam Smith’s moral philosophy, as stated in Moral Sentiments.

“Richard Wagner’s forthcoming review (in the Journal of Economic Behavior and Organization) raises an important issue largely ignored by Ostrom and many fellow New Institutional Economists. She accepts the definition of institutions as the rules of the game. Professor Wagner writes that “The danger in thinking of institutions as rules of the game is to think that legislation can serve directly as an instrument to change societal outcomes in some intended manner.” Implicitly institutions as rules of the game skews the analysis in favor small scale state planning. It biases policy proposals. It ignores that people do not respond like automatons. Sometimes they ignore rule changes and maintain their behavior (consider the effects of Prohibition, as Professor Wagner). A more fruitful approach views are "articulated descriptions of conduct." That is, rules emerge from social interaction rather than by decree. The latter approach has a place in Ostrom's framework. Hopefully, future research will pursue this agenda."

CommentI hope the research does pursue the agenda because Adam Smith has much to offer political science and economics in the matter of what might work and what doesn’t.

The sentence that institutional rules of the game ‘ignore’ that ‘people do not respond like automatons’, is perfectly Smithian. He warned about ‘men of system’ who believed that they could arrange people and their behaviours as if they were ‘wooden chess pieces’, when in fact ‘every single person’ had ‘a principle of motion’ of their own (TMS VI.ii.2.17: p 234).

I haven’t read her book, so I cannot comment on its merits, but it covers an interesting topic.

On Reading Moral Sentiments Too Fast

Stumbling and Mumbling, an economics Blog well worth reading regularly, is posting on Smith’s Theory of Moral Sentiments. I posted a comment on the site yesterday before another article appeared discussing an aspect of Smith’s apparent suggestion, according to S & M author, Chris Dillow, that with economic improvement people’s moral behaviour should improve and questioning if this is true. After discussing the possibilities he appears to conclude ‘that hierarchical capitalism is incompatible with the cultivation of Smithian virtues, or maybe many other virtues.” I am not sure what he means by ‘hierarchical capitalism’ and my response is not a defence or otherwise of ‘capitalism’; it is a response to his basic proposition that Smith’s Moral Sentiments may be ‘plain wrong’. I think his question is a good one and I shall comment on the extracts below.

“This raises a puzzle. Since Smith wrote this in 1759, we've become far richer than he could have imagined; real GDP per person is more than 15 times what it was in Smith's day. And yet it's not obvious that the "virtues of humanity" have improved accordingly. What went wrong?One possibility is that Smith was plain wrong; original sin doesn't disappear with economic growth. But there are (at least) three other possibilities:

1. The hedonic treadmill. As incomes have risen, so have our wants. So we've never achieved the "ease" Smith describes.

2. Smith confused wealth with status. It's status that helps cultivate a concern for others. Men of high status want to appear magnanimous. Men of low status are obsessed with getting "respect" from others. Contrast Bill Gates with the gangsta-wannabees that apparently infect our inner cities.

3. Power matters. The contemporaries that Smith regarded as virtuous were men of self-reliance and independence - professionals, minor aristocrats, tradesmen. Such men had some control over their lives. They learned, therefore, to be the owners of their own actions, as these had consequences which were beneficial or detrimental to them. Just as they saw that good business practice improved their fortunes, so they might have inferred that good moral behaviour improved their character.However, when people feel powerless - because say they are either out of work or in menial jobs - they don't feel in control. They don't feel that good behaviour leads to economic success or bad to failure. And if they can't cultivate their fortunes, why should they feel that they can cultivate the virtues? If any of these three possibilities is right, there's an unpleasant implication - that hierarchicalcapitalism is incompatible with the cultivation of Smithian virtues, or maybe many other virtues.”

CommentA thoughtful question but …. The Chapter Chris refers to is entitled ‘Of the Influence of Custom and Fashion upon Moral Sentiments’ and is only tangentially related to GDP (a 20th-century surrogate measure of wealth capacity). Consider an earlier sentence from the same chapter:

‘The different situations of different ages and countries are apt, in the same manner, to give different characters to the generality of those who live in them, and their sentiments concerning the particular degree of each quality, that is either blamable or praise-worthy, vary, according to that degree which is usual in their own country, and in their own times’ (TMS V.2.7: p 204).

There is no strict correlation between one age and its ‘manners’. Smith was not a determinist.

Smith adds: ‘Among civilized nations, the virtues which are founded upon humanity, are more cultivated than those which are founded upon self-denial and the command of the passions.’ He expected ‘humanity’ to be more prevalent, but not necessarily (or even at all) to be ‘universal’. Hence, his comments on the circumstances that ‘crowded out’, to call upon a phrase, a sense of humanity in a savage (hunting) society, as shown in the quotations selected by Chris.

And is not this Smithian proposition widely evident today? Earlier ages, earlier versions of our civilisation, were not noted for their humanity, except in a tiny minority of individuals in them.

The long struggle for justice over the whims of kings, local lords, petty officials, war criminals, brigands and piracy, family fathers, and all others inclined to be deficient in humanity, was part of that civilising process. What is regarded as tyranny in the recent past was way ahead in humanity compared to a hundred years previously. Take the case of justice in the Nelson’s Navy (the ‘Articles of War’) and today’s justice backed system of human rights in naval discipline, by no means total even now, and compare it with all previous centuries, in all armies and throughout society.

Similarly, war crimes are now a much bigger issue that they were before the 2nd World War; no ‘Make Poverty History’ (whatever we might think of its proposed ‘solutions’ as instruments to perpetuate it) campaign featured in Roman times across its empire, nor for a over thousand five hundred years after it fell. The decline of the ‘Victorian’ family in parental, mainly fathers’, tyranny is clear evidence that ‘humanity’ is not in decline. There is widespread revulsion if popular demonstrations are brutally dispersed.

That humanity still has a long way to go is self-evident, but the scale of change in competing norms is beyond challenge. But did Smith imply or require that civilised norms become universal; that all manifestations of inhumanity would disappear? Not at all. He had his feet firmly on the ground, not in the clouds, as many parts of Moral Sentiments shows.

There is less of a ‘puzzle’ that Chris Dillow suggests. Wherever humans operate, imperfections are prevalent too. Smith was not writing about perfection (or ‘right’) but ‘fact’. His book was a theory of the fact of moral sentiments within a minority or most of a society; it was not a manifesto to make them universal.